Consulting firm-KPMG has cautioned the government against rushing to tax the digital commerce warning it could fail due to lack of structures.
The firm has also outlined loopholes in the Capital Gains Tax, corporate tax incentives for recycling plants and the proposed amendments to the Value Added Tax Act under the Finance Bill 2019.
In its proposals presented before the National Assembly Finance committee on Thursday, KPMG tax experts said the country lacks the right structures and regulations to collect tax from the digital marketplace.
The Finance Bill, 2019 proposes to amend the Income Tax Act by introducing a new provision that now lists income accruing through a digital marketplace as income chargeable to tax in Kenya.
This comes in the wake of a global clamour and increased efforts to tax the digital economy.
According to KPMG, there is no consensus on how to tax such businesses as most of them have no physical presence in most jurisdiction where they accrue or derive revenue.
In most digital transactions, it is difficult to determine where value is created as most digital firms do not have physical presence in the countries of operation, the firm has said, while value creation, as opposed to legal ownership, determines where profits are to be allocated.
“How do you tax someone you don't know where they are doing their business from," said Peter Kinuthia, Partner Tax and Regulatory Services at KPMG.
He said people are making international orders online from their bedrooms. and there is need to define digital market and how they will be taxed otherwise the regulation will be difficult to implement.
KPMG said there is need to introduce a clause detailing the point at which revenue is considered to have accrued in Kenya, or may be deemed to have accrued in Kenya and the point at which it is taxable.
On Capital Gains Tax , KPMG proposed for the introduction of a clause on indexation, to allow for inflationary adjustment when computing the capital gain.
Treasury has proposed to raise the CGT rate to align it to the regional standard CGT rate which ranges between 20 per cent and 30 per cent.
“The raise represents a 150 per cent increase. It is therefore certain to elicit negative reactions from the stakeholders,” Kinuthia cautioned.
The government is also planning to introduce a tax incentive for recycling plants .
The proposed provision will see companies operating a plastics recycling plant taxed at 15 per cent for the first five years from the year of commencement of operations. This proposal only confers the incentive to new entrants in the sector.
To promote equity, tax experts have adived the clause be amended to enable all taxpayers in the industry enjoy the tax break, to allow existing companies to benefit from this incentive and therefore compete equally.
KPMG has also proposed the bill provides more clarity on the considerations to be made in arriving at the tax point, in the amendment of the VAT Act, to make the proposal feasible.
